Israel’s Strategic Energy Opportunity

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energyBy Jonathan Baron & David Wurmser

With in excess of 25 trillion cubic feet of natural gas discovered since 2009, Israel now enjoys historic opportunities to produce domestic, affordable, and secure energy. Realizing these benefits depends, however, on a consistent public policy framework that supports significant export. The economic and security needs of Israel, and the nature of natural gas markets, argue for an aggressive export strategy, as delays threaten the emergence of offshore Israel as an area of significant energy development.

As the government of Benjamin Netanyahu has been examining the question, the debate in Israel has tended to juxtapose the energy security advantages of maintaining a large strategic natural gas reserve against the economic and other benefits of export, which requires scale to justify the considerable capital expenditures to build the required infrastructure. Although the instinct to husband the resource is understandable given past and recent geopolitical volatility, foregoing significant exports is both unnecessary and ultimately would undermine the very energy security objectives sought by advocates of a large strategic reserve.

Israeli natural gas consumption currently equals roughly 200 billion cubic feet per year, measured against the aforementioned 26 trillion cubic feet of proven resource. Under any realistic scenario, Israel possesses ample supplies to ensure energy security in the power sector for a generation. Even assuming robust domestic demand growth and limited future discoveries, Israel will enjoy a large supply buffer once current reserves are developed.

Beyond the sufficiency of existing natural gas reserves, several factors support a public policy designed to encourage export.

First, offshore Israel remains in the early stages of exploration. The well-established pattern of such development suggests that the natural gas discoveries to date represent only a fraction of the total recoverable resource. Based on other basins, current discoveries in the Israeli Levant Basin likely are only a fraction of the total technically recoverable resources. Ensuring that investors are able to achieve an adequate return on capital through export in the near-to-medium term represents the most promising path to achieving much greater volumes and, in so doing, maximizing domestic supply over the long term.

Second, Israel presents producers with a complex security and regulatory environment. Tension with Turkey, Lebanon, Syria, Egypt, and the broader Muslim world makes investment in Israel by major energy companies a difficult decision. Although the reality of Israel defies the stereotype of a country defined by conflict and crisis, Israel does not enjoy a reputation as an attractive location for large-scale infrastructure projects. Whatever the public policy merits, recent changes to taxation and regulation of hydrocarbon development have heightened uncertainty and further disadvantaged Israel’s position with the oil and gas community. As expressed by Deutsche Bank Israel general manager Boaz Schwartz: “Every day, I am amazed anew, when I see how the country destroys national assets. Israeli regulators act as if they are in the Third World . . ..” The profit opportunities of offshore Israel likely will need to be especially attractive to overcome this perception and entice serious private-sector participants. A relatively accommodative export policy will be critical to this goal.

Third, Israel’s offshore natural gas represents a strategically vital resource that must be exploited with great care. Aspects of the Levant Basin in the equivalent of Israel’s Exclusive Economic Zone present challenging geology in deep water. Limiting exports risks restricting interested parties to less proven operators, as more experienced international companies prioritize competing opportunities in Asia, Africa, and other regions offering superior terms. The unintended result could be a higher rate of production accidents, with devastating consequences for both near-term development and the public confidence required for a stable and constructive tax and regulatory framework.

Fourth, an informed debate should recognize the possibility that a decision now to restrict exports could be difficult to reverse. Natural gas supply agreements often are measured in decades, and the world may be entering an extended period of increased natural gas production. Several trends – U.S. exports of unconventional natural gas, the application of the same unconventional natural gas production techniques to China, and the major offshore discoveries referenced above – mean that a delay in bringing exports to market could find Israel in a world where the supply requirements of energy importers have been met. This fate would undermine the rational for additional private-sector investment, resulting in fewer discoveries and smaller total proven reserves.

To be certain, Israel’s natural gas export policy must provide a supply buffer that accounts for the country’s demanding energy security requirements. One approach would peg the reserve volume to the time required in an emergency to transition the economy from natural gas to a substitute fuel. Under this policy, a strategic reserve equivalent to approximately 10-to-12 years of demand would be adequate in the unlikely event Israel were forced to make such a shift. As Israel’s natural gas consumption grows, the total volume that accounts for the 10-to-12 years of demand would increase accordingly.

Rather than basing the volume of reserves on an arbitrary time horizon, this concept would mitigate risk without driving away the investment Israel needs to leverage the enormous promise of abundant offshore energy.

The government of Israel bears a heavy responsibility in designing a natural resource strategy that safeguards the nation’s energy security in the coming decades. Natural gas export levels that allow producers to achieve attractive returns would increase the abundance and reliability of supply, as well as help unlock considerable macroeconomic and geopolitical advantages.

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2 COMMENTS

  1. If peace prevails in the Middle East and the right moves are made on the cube in the coming hours, days and weeks the GDP of the State of Israel; Judea and Samaria/The West Bank; Gaza; Jordan; Syria; Egypt; Lebanon and Saudi Arabia, as well as Persia, Turkey etc. will grow by at least 5% p.a. from 2013 onwards. Scarcity is a mindset. There are abundant energy reserves ready to be harnessed and used for the benefit of humankind. Scarcity is a mindset.

    BTW, the third presidential debate tomorrow night is very important.

  2. May be wiser to save the gas for Israeli use alone, given the constant turmoil and threat of boycotts in the region. The achieving of energy self-sufficiency can allow other sectors of the economy to grow unrestrained, and continue to generate increased revenue, as they have been doing even before these gas reserves were discovered. Now, they will have less worry, which can encourage new investment in high tech ventures, leading to still further growth opportunities.

    Furthermore, water shortages are always a problem, and the construction and operation of desalinization plants requires much energy. These gas reserves may be the tipping point that allows for economical operation of the water purification plants.

    In short, if you are given a windfall, don’t blow it on a wild shopping spree the first week, and then be forced to live in poverty the rest of your life. Plan ahead.

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